Residential Impact Fees in California Current Practices and Policy Considerations to Improve Implementation of Fees Governed by the Mitigation Fee Act

August 5, 2019

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About the Terner Center

The Terner Center formulates bold strategies to house families from all walks of life in vibrant, sustainable, and affordable homes and communities. Our focus is on generating constructive, practical strategies for public policy makers and innovative tools for private sector partners to achieve better results for families and communities.

For more information visit: www.ternercenter.berkeley.edu

Authored by:

Hayley Raetz Research Associate

David Garcia Policy Director

Nathaniel Decker Graduate Student Researcher

Elizabeth Kneebone Research Director

Carolina Reid Faculty Research Advisor

Carol Galante Faculty Director

About the California Department of Housing and Community Development The Department awards loans and grants to public and private housing developers, nonprofit agencies, cities, counties, and state and federal partners. The Department also develops housing policy, building codes, and regulates manufactured homes as well as mobile home parks.

Acknowledgments This report was made possible in part with support from the Packard Foundation. We are also grateful to the California Department of Housing and Community Development for the funding that made this report possible as well as the HCD staff who contributed thorough and thoughtful reviews as drafted this report. We would like to acknowledge the dedication of our undergraduate researcher Ryan Kelley-Cahill, whose work lent detail and insight to this report. We are indebted to the thoughtful feedback of Claudia Cappio, Sara Draper-Zivetz, Cora Johnson-Grau, and Gary Gerbrandt. As the lead author on the Terner Center report “It All Adds Up: The Cost of Housing Development Fees in Seven California Cities,” Sarah Mawhorter laid the analytical groundwork for this study, and we owe her a particular debt of gratitude. Lastly, we would like to thank the local agency staff, nexus study consultants, and other experts who took the time to work with us on this project; we would not have been successful without their generous assistance.

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www.ternercenter.berkeley.edu

Table of Contents

Executive Summary 4

Introduction 13

Background 14

Study Design 23

Fee Transparency 26

Fee Structure 31

Fee Design Process 49

Alternative Funding Options for City Infrastructure 58

Conclusion 75

Appendix A. Scan Cities and Counties 77

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Executive Summary Local governments levy fees and exactions to help fund the expansion of infrastructure needed to support new housing. These charges support important local services, such as school, parks, and transportation infrastructure, which many California jurisdictions are struggling to fund. State-imposed policies that restrict local taxes, such as Proposition 13, leave municipalities with limited means of raising revenue for infrastructure. As a result, California jurisdictions have increasingly relied on development fees. While fees offer a flexible way to finance necessary infrastructure, overly burdensome fee programs can limit growth by impeding or disincentivizing new residential development, facilitate exclusion, and increase housing costs across the state.

In this report, the Terner Center for Housing Innovation at UC Berkeley analyzes the use of residential “impact fees”—development fees regulated by the Mitigation Fee Act—to inform policymakers on the trade-offs of policies intended to improve housing supply and affordability. This report focuses narrowly on impact fees and reviews of policy approaches to reduce Mitigation Fee Act fees on residential development, as stipulated by the Legislature in AB 879 (Grayson, 2017). However, impact fees exist within a much wider ecosystem of fees and exactions charged to new development (see table), thus some of the findings and implications of this analysis could apply to that broader ecosystem.

Development Fees by Type and Authority

Exaction Eligible Uses Subject to the Mitigation Fee Act?

Subdivision Map Act In-Lieu Fees

Must be tied to General Plan (e.g. bike paths, open space, etc.)

No

Quimby Act In-Lieu Fees Parks No

Inclusionary Housing Ordinance In-Lieu Fees

Affordable housing No

Utility Connection Fees Cost to provide connection to utility system

No

School Facilities Impact Fees

School facilities No

Permit Processing Fees Costs associated with permit processing

No

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Development Agreements (DA)/Community Benefit Agreements

Contracted between the jurisdiction and the developer

No

CEQA In-Lieu Mitigation Fees

Mitigate projects’ environmental impacts through actions identified in an EIR under CEQA

Yes (if non-voluntary)

Impact Fees Any impact reasonably attributed to new development

Yes

Exaction Eligible Uses Subject to the Mitigation Fee Act?

To better understand how impact fees are developed, structured, and implemented, we interviewed agency staff, nexus study consultants, land use law experts, and municipal budgeting experts across California. We also conducted case studies of fees, nexus studies, and capital improvement budgets in a cross-section of jurisdictions throughout the state.

This report presents the findings of our interviews and case study analysis and also explores an assortment of potential reforms to the current system that arose in our research and engagement process. While each policy proposal that surfaced is intended to better balance efforts to have residential development “pay its way” with strategies to ensure that fees are transparent and reasonable, each comes with benefits and costs. In addition, some proposals are more feasible than others, some may function best in tandem or instead of one another, and others may have costs or unintended consequences that could outweigh their benefits. Given the complexity of these issues, a reform agenda could take many different forms. By laying out the pros and cons of each policy alternative, this report aims to inform the public conversation and ground state policymakers as they consider a variety of pathways to lower impact fees.

Findings Based on a survey of 40 jurisdictions, in-depth case studies in 10 localities, and interviews with almost 30 experts, we explore four key aspects of impact fees in California. First, we review current practices around fee transparency and consider proposals to improve the predictability of impact fees. Second, we examine typical fee rate structures and weigh proposals that would adjust fee structures to better promote housing supply and affordability. Third, we outline the tools that localities use to design fee programs, including nexus and feasibility studies, and analyze the potential impact of proposals that aim to lower the burden of fees on development. Finally, we consider the alternative options available to fund local infrastructure and outline the trade-offs of different approaches aimed at shifting local budgets towards other funding sources.

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Fee Transparency For fees to be truly transparent, the public and developers should be able to easily access the nexus studies used to establish impact fees as well as current fee schedules, and they should be able to estimate related project costs in advance. The ways impact fees are implemented under the current legal and regulatory framework reveal:

● Nexus studies are rarely easily available to the public; only 28 percent of the localities surveyed posted all of their nexus studies clearly online. Often, researchers had to sift through city council agendas or submit a public records request to access the studies.

● Development fee schedules, including impact fee schedules, are often unclear and difficult to find. Confusing or fragmented schedules limit developers’ ability to estimate their costs for a prospective project and hinder oversight and transparency.

● While impact fees are relatively straightforward to calculate, estimating the full stack of development fees is often challenging. Developers need to be able to estimate their local costs in order to draft precise proformas and accurately assess the feasibility of a project. In addition, tracking the full range of development fees would help localities gauge the effect of adding any type of fee on local development costs.

Improving Fee Transparency

To increase transparency and predictability of fees, the state could consider the following approaches:

➢ Require jurisdictions to clearly post all nexus studies and any related feasibility studies on localities’ websites. The public, developers, researchers, and other jurisdictions would have easier and more reliable access to these important analyses.

➢ Require jurisdictions to post clear, comprehensive, and up-to-date development fee schedules. Fee schedules would clearly present details on fee variation by geographical area.

➢ Require local governments to make annual fee reports easily available to the public. Annual impact fee reports, which list fee schedules, fee revenue, and projects funded by fees, would be consolidated within a locality and also made easily available online.

➢ Require jurisdictions to confirm the availability of their fee schedules and annual fee report in their Annual Progress Reports (APRs) for their Housing Element. This adheres to the spirit of housing element law by encouraging transparency of required development fees.

➢ Require jurisdictions to provide fee estimates as well as public guidance on how to calculate development fees. By providing fee estimates, localities can help developers determine their total project costs more accurately. Updated fee schedules with clear guidelines for calculating fees would also improve the transparency of local fees for the general public, including researchers and other governments. Clear fee schedules and estimates could take the form of a workbook or an online program and would include all development fees, with the exception of project-specific exactions.

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The state could provide technical assistance or support for municipalities with limited capacity to undertake these fee transparency requirements.

Fee Structure

The way local governments structure their fees can affect the cost to developers, and can incentivize different types of housing. A review of current practices, and an estimation of impact fees for a prototypical single-family and multifamily development in our case study localities, found the following:

● The timing of fee imposition varies depending on the jurisdiction and the fee. Some localities impose fees—meaning they establish the total cost of fees for a project—at the time of building permit application, while others wait until the issuance of the certificate of occupancy. Imposing fees later in the development process can hinder precise project cost estimation and thus increase risk for developers.

● The timing of fee collection varies widely. Some jurisdictions collect fees when permits are issued and others collect when the certificate of occupancy is issued. Collecting fees earlier extends the length of time developers must carry the cost of fees.

● Impact fees on accessory dwelling units (ADUs) can vary widely; many localities waive them completely, while others charge as much as $50,000 per unit. ADUs are typically built on single-family lots and tap into existing infrastructure, lessening their impact on public facilities.

● Localities often rely on geographically-specific impact fees in order to account for variations in infrastructure costs. This common practice ensures that fee rates closely reflect the cost of improvements. It also distributes the cost between developments that will benefit from the new infrastructure, ensuring that no one project is left to shoulder a majority of the burden.

● When infrastructure needs transcend jurisdictional boundaries, inter-jurisdictional fees provide a streamlined way to mitigate impacts. These fees also offer a way for less-resourced localities to leverage fees for infrastructure funding.

● Impact fee amounts vary widely across localities. Fees on prototypical projects in our ten case study localities varied by as much as $19,100 per unit for a multifamily project and by as much as $29,600 per unit for a single-family project. Variations in fee levels reflect differences in local housing markets as well as in local funding strategies and priorities.

● Uses of fee revenue varies across localities. While some localities focus their impact fee use entirely on transportation funding, others prioritize funding for parks or affordable housing.

● In all ten of our case study jurisdictions, the cost of impact fees per square foot was lower for single-family projects than for multifamily projects. However, when assessed at the unit level, the cost of impact fees for the prototypical single-family project was higher than for the prototypical multifamily project in eight of the ten jurisdictions. Localities have some flexibility to choose how they structure fees, including the basis on which fees are calculated, and, in doing so, can intentionally or unintentionally incentivize certain types of development.

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Improving Fee Structure

To ensure that impact fee rates are structured in ways that encourage housing supply and affordability, the state could weigh the benefits and costs of the following approaches:

➢ Determine fees earlier in the development process. Calculating fees based on fee rates in effect at an earlier point in the development process would lower risk for developers. This approach would need to set fee determinations contingent on the project receiving a certificate of occupancy within a strict time frame; projects that stall would be subject to changes in fee rates. While some interviewees highlighted this as a valuable approach, others raised concerns that it could result in the collection of outdated fee amounts and imperil infrastructure funding.

➢ Require jurisdictions to consider alternative multipliers for fees and to justify their choices. The fee basis can further or undermine policy goals; for example, setting fees on a per-unit basis incentivizes less-dense development. Conversely, charging lower fees to reflect the lesser impacts of multifamily developments, particularly when they are situated near transit or built for special needs populations, can incentivize more affordable and sustainable unit types. Weighing different potential fee structures as part of their nexus study and presenting a justification would require cities and counties to consider the relationships between infrastructure impacts, housing affordability, and sustainability goals. However, interviews raised concerns that this may increase costs for localities with limited impact; without meaningful oversight, localities could easily justify their desired fee structures.

➢ Consider different approaches to reduce fees on ADUs to encourage their development. These approaches range from expanding requirements around nexus study prototypes to mandating fee waivers, and each approach presents its own trade-offs. Lowering fees on ADUs could remove a key obstacle for small-scale owner-developers and incentivize housing production in single-family neighborhoods.

➢ Require jurisdictions to determine if separate fees for infill and greenfield developments are necessary, and if so, calculate fees separately based on the cost to bring service to the respective type of project. While this approach would assuage some concerns that fees are not always proportional to impacts, it would be challenging to implement, and other alternatives that seek to improve the precision of nexus studies may better achieve this goal.

➢ The state could establish additional nexus guidelines for inter-jurisdictional fees. Guidelines could assuage concerns that inter-jurisdictional fees, particularly those that cover a large region, may be less closely tied to impacts. However, interviews noted that the current nexus guidelines function well for inter-jurisdictional fees, and did not highlight this approach as a priority.

While the Legislature may determine that some of the policy considerations above may not be appropriate for statewide regulation, the state could provide technical assistance to encourage localities to implement them as best practices. Other best practices related to fee structure and implementation that surfaced in our interviews include the following:

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● Splitting collection times for fees: Cities and counties could review their more costly fees and consider whether they can afford to collect a portion of those fees later in the development timeline.

● Implementing fee deferral programs: Some localities build more flexibility into their fee timing by designing fee deferral programs. Deferral programs represent an important tool for localities to accommodate developer concerns when fiscally possible.

● Increasing fees incrementally: Rather than applying the full amount of a fee or fee increase when approved, localities can stage its implementation in steps over a period of time to give the housing and land markets a chance to adjust to the higher cost of development.

● Adjusting rates for submarkets within a locality when sufficient variation exists: Zoning rates according to local housing markets or changes in project impacts can ease the impact of fees on weaker submarkets and ensure that fees accurately reflect project impacts.

Fee Design Process

The way fees are designed affects the cost of development. Ambitious policy proposals that surfaced during our interview and case study analysis reframe the way fees are devised, including the nexus studies that set the maximum legal impact fee based on the cost of infrastructure needed to serve a new project. Interviews with agency staff and nexus study consultants, and reviews of nexus studies in 40 jurisdictions, demonstrate:

● While state statute does not require a specific methodology for nexus studies, most studies follow a similar structure. Nexus methodologies vary according to fee type—a parks fee requires a different analysis than an affordable housing fee, for example. Furthermore, methodologies can vary within fee types, depending on planning strategies, whether a locality expects greenfield or infill development, and the data available, among other factors.

● Nexus studies generally assess impacts across broad categories and geographies, and assessed fees are not required to be tied to specific improvements or areas in a jurisdiction. Nexus analyses are sometimes used to justify fees used for improvements far removed from a particular development—for example, a transportation fee charged to a project may be used to expand a section of road on the other side of the city—as long as the improvement aims to maintain an overall level of service for the jurisdiction.

● Localities have the authority to determine acceptable levels of service, which can influence the maximum fee level defined by a nexus study and increase variation between jurisdictions. Localities determine and plan to meet levels of service for major types of infrastructure, including parks, transportation, and fire protection. Once a city determines its desired level of service, a nexus study calculates the maximum fee amount based on the cost of providing that level of service to new residents. For example, one city may decide that the appropriate amount of parks should be 5 acres per 1,000 residents, while another may decide on 3 acres per 1,000 residents. A nexus study consultant would then determine what an appropriate park impact fee should be for new development in order to maintain that city’s desired level of service.

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● Fees are often set under the legal maximum amount as defined by the nexus study, with notable exceptions. While many localities set their fees well below the legal ceiling, some ask new developments to pay for all related infrastructure costs to support high levels of service, which may prove exclusionary in practice by stymieing new development or increasing housing prices.

● While most jurisdictions make good-faith efforts to consider feasibility when setting rates for individual fees, their processes often do not adequately analyze the impact of total fee amounts on housing supply. Determining whether a fee is overly burdensome can be challenging, particularly when housing markets may vary within a locality. Decision makers often rely solely on a comparison of fee levels from adjacent or similar cities to determine a reasonable fee amount, but those comparisons often fail to consider the highly localized nature of the housing market.

Improving Fee Design

Improved fee design processes have the potential to lower the cost of impact fees broadly, or to rein in outlying fees. To facilitate these benefits, the state could weigh the trade-offs of the following approaches:

➢ Set guardrails around the levels of service or investment that can be considered in a nexus study. By setting reasonable caps on service standards used by localities to determine the cost of impacts and set maximum fee amounts, the state could rein in overly burdensome fees. However, localities often set fees well below the maximum legal amount. If policymakers wish to lower fees more broadly, additional approaches may be needed.

➢ Require cities to establish stronger connections between the fees they charge and the actual impacts of a specific development. The Mitigation Fee Act could be amended to require a stronger tie between the fees local governments collect from projects and the infrastructure funded by fees. Specifically, Section 66001 of the California Government Code could be changed to require local agencies connect their nexus studies and fee schedules to a Capital Improvement Program (CIP), and make stronger connections between fees levied and the infrastructure the fees will finance. Similar to the proposal above, this approach would likely lower outlying fees because many localities already set their fees below the legal maximum. If policymakers wish to decrease fees more broadly, this approach would need to be paired with additional policy levers.

➢ Create a feasibility standard for determining fee amounts. Cities and counties could be required to consider the impact of proposed fees and fee increases on new development by incorporating a feasibility standard into their decision making process. Any consideration of feasibility should take into account the full universe of fees and exactions and review how they layer onto a development in the context of a local housing market. Interviews emphasized that such a requirement would represent a significant cost to localities, and runs the risk of “pricing out” less-resourced localities from implementing impact fees. If policymakers decide to take this approach, they should strongly consider developing a feasibility tool, and providing technical support to lower the burden of analysis on localities. Localities could use the tool or choose to conduct their own analysis, subject to review and approval by HCD.

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➢ The state could cap impact fees based on a set formula. Proposals to cap fees have gained some political traction as a simple approach to lowering impact fees, but fee caps ignore the variation in how cities pay for infrastructure and may be too blunt an instrument. In many cases, high fees are a symptom of increasing strain on local budgets. Interviewees were almost unanimous in cautioning that capping the revenue stream provided by fees could severely hinder the ability of localities to fund their infrastructure needs. Other, more complex proposals that aim to lower impact fees may be less disruptive to local budgets, but might require technical assistance to implement.

Alternative Funding Options In AB 879, the California Legislature called for recommendations to reduce impact fees. Impact fees in California are high relative to other states, and high fees can increase the cost of housing and stymie production. Still, any step taken to lower fees on housing development should be considered in the broader context of local fiscal conditions and constraints. California localities rely on fee revenue to a greater extent than their peers nationwide, and this reliance is in large part due to the intersection of intense growth pressures and severe limitations on traditional forms of revenue generation (e.g., property taxes). Fees are used to support the funding of much-needed growth-related infrastructure. However, it is possible for municipalities, intentionally or unintentionally, to establish fee schedules that can in practice be exclusionary, regressive, or harmful to housing affordability.

We reviewed the impact fee revenue and CIP budgets for five different localities and found:

● Impact fee revenue and CIP budgets vary widely, reflecting differences in local needs and priorities. Young, growing localities with a significant amount of greenfield development, like Roseville, rely heavily on impact fees to fund infrastructure like roads and parks. In contrast, older, urbanized communities with greater maintenance needs, like Los Angeles and Oakland, fund the majority of their infrastructure improvements from other sources, such as user charges and local bonds, and are more likely to use impact fees to fund affordable housing.

Improving Local Financing for Infrastructure

In order to encourage localities to use other infrastructure funding mechanisms that have less impact on housing production, the state can weigh the following approaches:

➢ Require cities and counties to justify why an impact fee is the most appropriate mechanism to fund the proposed infrastructure. Localities could be required to consider whether fees are the appropriate tool, among the others available to them, to raise local revenue for critical infrastructure without overburdening new housing production. However, this approach does little to address the fact that there are few alternative funding mechanisms available to localities, particularly given California’s restrictions on raising property and special taxes. Interviewees asserted that this alternative would likely prove ineffective, given that localities could easily justify impact fees and could reuse similar justifications for each fee update or approval.

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➢ Build local capacity to use other forms of infrastructure funding. By assisting local governments to employ more politically feasible, but complex forms of financing, such as tax increment financing in the form of Enhanced Infrastructure Finance Districts (EIFDs), the state could reduce pressure on local budgets.

➢ Revisit ways to better support local infrastructure and planning, including statewide tax reform. As long as current restrictions around tax revenue and other forms of local funding remain in place, California localities will rely more heavily on other sources of infrastructure funding, including impact fees, development agreements, Community Facilities Districts (CFDs), and other exactions on residential development. The legislature could consider new programs to backfill infrastructure funding, such as providing additional funding to localities that meet their Regional Housing Need Allocation (RHNA). The legislature could also consider changes to the Proposition 13 framework to directly address the underlying problem and expand local access to infrastructure funding. However, policymakers should review any tax reform— including measures placed on the ballot by initiative—for negative effects on housing supply, and should implement parallel efforts to address those consequences.

Next Steps As stipulated in Assembly Bill 879, this report seeks to weigh the costs and benefits of a range of policy alternatives aimed at lowering impact fees on residential development. Impact fees represent only one part of a much wider universe of development fees, and additional research is needed to review the relationship between development fees, broadly, and the cost of housing. We hope that our findings and analysis in this report—informed by talking to stakeholders, reviewing current literature, and estimating impact fees across the state—helps policymakers make informed choices when considering how to curtail unreasonable fees without hindering the financing of local infrastructure.

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Introduction This report traces its origins to Assembly Bill 879 (2017), in which the California Legislature directed the Department of Housing and Community Development to conduct a study of impact fees and their relationship to housing affordability. The bill, by Assemblymember Timothy S. Grayson (D-Concord), expands annual housing development reporting requirements at the local level. The bill also amended §50456 (b) of the Health and Safety Code, calling for the Department to:

complete a study to evaluate the reasonableness of local fees charged to new developments as defined by subdivision (b) of Section 66000 of the Government Code. The study shall include findings and recommendations regarding potential amendments to the Mitigation Fee Act to substantially reduce fees for residential development.1

In this report, we review the current practices surrounding fees that are subject to the authority of the Mitigation Fee Act and levied on new development for related infrastructure costs (commonly referred to as “impact fees”). The report evaluates a range of policy alternatives that have the potential to lower fees on residential development, as stipulated in AB 879.

In order to determine the “reasonableness” of impact fees, we first reviewed current fee implementation. In a scan of cities and counties, we found fee schedules and other public reports related to impact fees to be difficult to access. As a result, this report relies on a case study approach to assess the full range of fees at the local level.

Next, we consider structural factors that affect the cost of fees on development. We review the implications of the timing of fee imposition (when fees are assessed for a project) and fee payment for developers, and weigh the costs and benefits of different approaches aimed at adjusting fee timing to lower costs. The structure of fee rates can affect the cost of fees as well, incentivizing different housing types. We evaluate a number of potential policy reforms that aim to structure fees so that they closely reflect the cost of development impacts while encouraging sustainable and affordable housing types.

Policymakers and advocacy groups have put forward several policy solutions that take a more ambitious approach to lowering costs. We evaluate policy alternatives that would change the foundations of fee rates. These approaches include setting stricter guidelines around the required nexus between fee amounts and costs, setting statewide standards for levels of service that can be supported by fees, compelling local governments to consider the feasibility of fees in their current market, and capping fees outright.

Finally, we consider the implications of restricting fees on local budgets. Fees are exceptionally high in California; this is, in part, because many California municipalities find themselves facing intense growth pressures coupled with severe limitations on traditional revenue sources. Localities rely on a variety of tools to collect the revenue they need, ranging from taxes to intergovernmental transfers. We find that, among the revenue options available to localities, fees provide a flexible funding tool and can generate substantial revenues in strong markets.

This report seeks to inform policymakers and the public of the trade-offs inherent in a range of policy approaches, and bring nuance to the conversation around impact fees in California.

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Background

Development Fees Development Fees vs. Impact Fees

This report focuses on “impact fees,” fees that fall under the authority of the Mitigation Fee Act. However, localities charge a host of other fees on new development to cover the cost of infrastructure related to that development. These fees include permit processing fees, utility connection fees, school fees, and others (see Table 1 for a complete list). All of these fees, including impact fees, are referred to collectively as development fees.

Development Fees as a Local Revenue Source

Charges on new development represent a key source of local revenue in California, funding infrastructure in a time of increasing costs. Cities and counties have relatively few revenue sources at their disposal, and the state of California has imposed strict limits on the use of taxes, still cities’ largest revenue source. Compared with the U.S. average, California counties and cities now collect relatively little of their own-source revenue (revenue generated by the local government itself) from taxes, and the share of revenue from property taxes declined from 58 percent of own-source revenue in 1972 to 36 percent in 2012.2 This is largely a result of state-imposed policies such as Proposition 13, which was passed in 1978 and sets strict limits on property taxes as well as special taxes levied by local governments. The state of California also sets statutory limits on sales and uses taxes and entirely preempts local personal income taxes. Additionally, Proposition 218, passed in 1996, requires majority or supermajority voter approval to impose, extend, or increase any state or local tax, limiting the political feasibility of taxes as a revenue source.3/4

As tax revenues have constricted, a number of important intergovernmental transfers to local governments have also declined or been eliminated. Federal support to local communities has waned for decades. Large block grant programs to support infrastructure and housing goals such as Community Development Block Grants and the HOME Investment Partnership Program have been cut by half or more from their peak funding.5/6/7 The 2012 elimination of California’s Redevelopment Agencies, which funded local priorities via tax-increment financing, both removed a source of revenue and, in many cases, saddled cities with the liabilities of the dissolved agencies.8

Declines in revenue from taxes and transfers have been largely offset by an increase in local charges and other sources of revenue. Charges include all revenues designed to cover the costs of various services provided by local government. These include garbage collection and sewage fees, fees from municipal seaports and airports, charges paid by hospitals to counties, and, importantly, impact fees.9 California counties and cities now collect over 45 percent of their own-source revenue from these sorts of charges. This is substantially higher than the national average of about 38 percent, and much higher than the 25 percent of own-source revenue that Californian cities and counties collected from charges in 1972.10 Today up to a third of some California cities’ budgets are composed of development-related fees.11 The largest category of these fees (29 percent) relate to utility fees, which cover a development’s water, sewer, electric, and gas requirements. Fourteen percent come from other fees, which can include traffic fees, park fees, and administrative fees.12

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Increasing Local Infrastructure Costs

While tax revenue and intergovernmental transfers have decreased, the capital needs of local governments have grown, propelled by population growth and aging infrastructure. From 1990 to 2010, the state’s population grew by 7.5 million.13 This growth required investment in a broad array of new infrastructure, much of which relied on local government funding. It also put additional pressures on existing infrastructure. Given the constrained revenue environment, many cities’ infrastructure systems show the wear of years of deferred maintenance. While estimates of the collective capital needs of local governments are unavailable, the state estimated that it had accrued $77 billion in deferred infrastructure maintenance costs by FY 2016/17.14 In 2016, the City of Oakland estimated that the backlog of street maintenance alone was $443 million,15 while the total annual budget of the city was $1.2 billion.16

The state and federal governments have also imposed a number of new requirements and guidelines regarding the level of services local governments must provide, including infrastructure. Local governments must now comply with mandates regarding the provision of clean water, sewage treatment, transportation, energy efficiency, and housing production and location goals even as support from the federal and state levels has dwindled. For example, the federal Clean Water Act requires local governments to make substantial investments, for which the federal government provides only limited support.17 While Proposition 4, passed in 1979, in theory requires the state to reimburse local governments for additional requirements imposed by the state, in practice this law has failed to alleviate the fiscal pressures imposed on localities.18

With few options to generate revenue and faced with pressing current and anticipated capital needs, California cities have increasingly relied on impact fees as a revenue source. While it is difficult to depict a detailed picture of this shift (due to a lack of a comprehensive data source on local financing), a number of surveys and analyses have shown that fees are commonplace in the state, that fees are high relative to the rest of the country, and that there is substantial variation in the extent to which California localities rely on fees to finance growth.19/20 Rising fees often translate to higher housing prices. By relying on fees rather than taxes to fund infrastructure, localities ask less of existing property owners and more of new residents. Greater fees can also cut into government subsidies for affordable housing projects (with the notable exception of affordable housing impact fees, which are typically waived on affordable projects and fund affordable housing development).

Defining Impact Fees

In order to cover the cost of new development, cities and counties typically use a mix of different fees. Development fees come in many forms, and fall under a variety of regulations (Table 1).

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Table 1: Development Fees by Type and Authority

Exaction Authority Eligible Uses Subject to the Mitigation Fee Act?

Subdivision Map Act In-Lieu Fees

Subdivision Map Act

Must be tied to General Plan (e.g. bike paths, open

space, etc.)

No

Quimby Act In-Lieu Fees Quimby Act Parks No

Inclusionary Housing Ordinance In-Lieu Fees

Police Power and AB 1505

Affordable housing No

Utility Connection Fees Various Statutory Authorities Depending on Type

of Utility

Cost to provide connection to utility system

No

School Facilities Impact Fees

Education Code New school facilities constructions.

No

Permit Processing Fees Police Power Costs associated with permit processing.

No

Development Agreements (DA)

Government Code §65864 - 65869.5

and Contract Law

A contract between the jurisdiction and the developer that can include

fees and other exactions

No

Community Benefit Agreements (When independent of a DA)

Contract Law A contract between a third party and the developer

with no limitations

No

CEQA In-Lieu Mitigation Fees

Various/Police Power

Mitigate impacts of projects on the environment through actions identified in an EIR under CEQA

Yes (If non-voluntary)

Impact Fees Police Power Any impact reasonably attributed to new development

Yes

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Fees exacted under the Mitigation Fee Act (MFA) constitute just one portion of a much broader slate of residential development fees. For example, the education code, rather than the MFA, regulates school impact fees exacted to build new school facilities. In-lieu fees collected under the Subdivision Map Act and the Quimby Act also fall outside of the authority of the MFA, as do permit processing fees. Contract law regulates development agreements, as a form of contract between the locality and the developer, as well as community benefit agreements, as contracts between a third party and the developer. While water and sewer connection fees must abide by certain provisions of the MFA, including covering only the reasonable cost of services, they are excluded from the Act’s findings and accounting requirements. Mitigation fees identified and required through an environmental impact report (EIR) conducted under the California Environmental Quality Act (CEQA) are subject to the MFA. Taken together, these fees can represent a sizable proportion of development costs.

In It All Adds Up: The Cost of Housing Development Fees in Seven California Cities (2018), the Terner Center estimated the development fees for two prototypical developments: one single-family project and one multifamily project. The study defined development fees as any fees levied on a project, inclusive of impact fees, special assessment districts, Quimby Act in-lieu fees, inclusionary housing in-lieu fees, and fees covering the cost of staff hours and overhead in the development process. That analysis excluded utility fees due to their complexity.

It All Adds Up identified several issues with the implementation of development fees. Namely, fees can be difficult for a developer or member of the public to estimate and, because they are often set without oversight or coordination between departments, they can vary widely between jurisdictions in terms of both type and size. Additionally, fees can be very expensive; our analysis of fees found that they represented anywhere from 6 to 18 percent of the local median home price, often with additional exactions, such as development agreements, which, if project-specific, are not captured in any fee schedule. That report called for more transparency around development fees and for the adoption of objective standards to determine the amount of fees that can be charged. It also found that state action could be warranted to codify when fees can be levied and changed during the development process, so that builders can better estimate their costs up front. Finally, it underscored the need to identify alternative ways to pay for new growth, in order to lessen the burden on new residents.21

Building on the findings of It All Adds Up, we focus here only on fees subject to the Mitigation Fee Act (often referred to in this report as “impact fees”), per AB 879, but not project-specific fees required by an EIR (as identified in the final column of Table 1). While more research on all types of development fees is needed to consider how different types of exactions align with local needs, that topic falls outside of the scope of this paper. However, many of our recommendations about transparency could apply more broadly to how cities and counties implement all development fees.

Impact Fees Impact Fee Regulation and Case Law

While localities began exacting fees to finance infrastructure in the 1920s, legislation, court rulings, and regulations have since molded impact fees into their current form. Article 11 of the California Constitution grants cities and counties police power to draft and enforce ordinances and regulations to maintain public health, safety, and welfare. Fees fall under this police power, and went largely unchecked until state courts

17

required a “reasonable relationship” test in Ayres v. City of Los Angeles in 1949, requiring that any exactions on development be reasonably related to the impact of the project on public infrastructure. The California Supreme Court later expanded this test, ruling that development fees could also be used to mitigate indirect development impacts in Associated Homebuilders Inc. v. City of Walnut Creek (1971). In 1976, the California Attorney General affirmed this ruling with an opinion asserting that a locality can impose exactions that are related to their general plan and hold, at minimum, an indirect relationship with project impacts.22/23

By raising the voting threshold from a simple majority to two-thirds vote for proposed taxes and restricting property taxes, Proposition 13 (1978) both shrank and limited funding sources for cities and counties. The following decade saw localities increasingly turn to impact fees to pay for infrastructure needs. The U.S. Supreme Court set a key limitation on fees in Nollan v. California Coastal Commission (1987), ruling that local agencies must demonstrate an “essential nexus” between the project impact and the fee charged.24

The California State Legislature also passed Assembly Bill 1600 and enacted it as the Mitigation Fee Act in 1987, which more stringently regulated impact fees. The Act defined impact fees as those imposed on projects to cover the costs of their impacts on public facilities, but excluded Quimby Act in-lieu fees, fees covering the cost of processing applications, or those collected under development agreements.25

In the 1990s, the courts further refined the standards of scrutiny for development fees. In Dolan v. City of Tigard (1994), the U.S. Supreme Court established a two-pronged test for exacting real property, such as land. The first requirement affirmed the Nollan ruling that there must exist a nexus between the state interest and the exaction itself. The second prong stipulated that the exaction be “roughly proportional” to the project impact. The California Supreme Court applied the heightened scrutiny standard of the Nollan/Dolan test to project-specific fees exacted in an ad hoc basis in Ehrlich v. City of Culver City (1996). Under the Nollan and Dolan rulings, the government must demonstrate the reasonable relationship between a proposed fee and project impacts, also required under the MFA in the form of legislatively-enacted findings. However, once the city or county approves the fees, a developer contesting a fee must prove to a court that the fee does not advance a legitimate state interest or that it precludes viable economic use of the land.26 The MFA, together with established case law, regulates how local agencies set and report on impact fees.

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2020

2000

• ··················· ··· ···········································

······ ·················· ······ ·················· ·······• (2017)CaliforniaAssemblypassesAB 879

aimed at expanding annual reporting requirements for localities regarding housing

development statistics

(1996) California Supreme Court applies the ·············· · ·················· · ··········· ·· ··■ high scrutiny standards set in Nollan/ Dolan (1994) US Supreme Court establishes two-

in Ehrlich v. City of Culver City pronged test in Dolan v. City of Tigard

• ·············· ······ ···· ················· ···· ··· ·········· ·· ········· ······ ··············· ············· ·• (1987) California State Legislature enacts the

1-fitigation fee Act(AB 1600) 1980 • ··············································

(1978) Voters pass Proposition 13, limiting municipal funding sources

• ············ ······ ···· ···· ·········· ··· ········ ····· ···· (1971) The California Supreme Court loosens

impact fee restrictions in Associated Homebuilders Inc. v. City ofWalnut Creek

1960

1940

• ····· ·· ················ ····· ······1920··· (1920) Localities begin axacting fees to finance

infrastructure maintenance and expansion

1900

(1987) US Supreme Court requires an "essential ne:...:us" for

impact fees in Nollan v. California Coastal Commission

·······················································• (1976)CaliforniaAttorney

General affirms the California Supreme Court's 1971 ruling

············· ········ ·· ········ ················· ···· ···• (1949) California Supreme Court rules in Ayers v. City of Los Angeles, setting

the precedentforthe "Reasonable Relationship" standard

Figure 1: Impact Fee Historical Timeline

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Impact Fee Implementation Under the Mitigation Fee Act

Local jurisdictions assess impact fees (also referred to as “AB 1600” fees) according to the regulations set out in the MFA and refined through case law. First, a city or county must select an impact fee as their instrument of choice to raise revenue. As noted, localities have relied on impact fees for almost 100 years, but some larger, more urbanized cities, such as Los Angeles and Oakland, only recently established substantial citywide impact fee structures for residential projects. In 2015, the Los Angeles City Controller released an audit of the city’s impact fees, calling for broader use and better management of the fees and noting that the city might be missing out on as much as $91 million per year in potential revenue on commercial, industrial, and residential development.27 Since then, Los Angeles has established city-wide parks and affordable housing impact fees. Oakland’s decision to implement a city-wide impact fee structure—covering affordable housing, transportation, and capital improvement costs—was motivated, in part, by court decisions that restricted the reach of their inclusionary zoning program to for-sale projects.

Once a city or county decides to establish a new fee, they typically satisfy the reasonable relationship standard of the MFA by conducting a nexus study. This study quantifies the impact of new development on local infrastructure and determines its cost, the maximum legally defensible fee amount. Exceeding the fee ceiling could leave a locality vulnerable to litigation. Typically, jurisdictions contract out the studies to consultants who specialize in such analyses, looking for firms with a history of crafting fee studies that hold up to scrutiny. We explore nexus studies in more detail later in this report.

Cities and counties often draft capital improvement programs (CIPs) in concert with their proposed fee program. Capital improvement programs plan the construction and financing of public facilities within a jurisdiction (Gov. Code §65403). The MFA encourages the use of CIPs to set out the planned use of fee revenue for improvements related to new development, but it does not require it. Nexus studies, particularly when combined with CIPs, bolster the required findings for a city establishing or increasing a fee, by requiring that the jurisdiction: identify the fee’s purpose and use, determine a reasonable relationship between the fee’s use and the type of the project required to pay the fee, determine a reasonable relationship between the need for the public facility and the type of project required to pay the fee, and demonstrate a reasonable relationship between the amount of the fee and the costs of the facilities needed to cover developmental impacts (Gov. Code §66001(a) and (b)).

The city or county drafts the fee ordinance, and must receive feedback via at least one public hearing before adoption (Gov. Code §66018). The locality may collect fees beginning 60 days after the passage of the ordinance, and must create separate funds to collect revenue from each impact fee. Furthermore, agencies must draft annual reports on the status of the funds, including descriptions of each fee and the balance and use of each fund (Gov. Code §66006(a)). Five years after the city or county begins to collect revenue, and every five years thereafter, they must identify the fee purpose and demonstrate the reasonable relationship for fees with unspent revenue (Gov. Code §66001(d)).

Under the Mitigation Fee Act, any party may protest or request an audit of development impact fees. If a developer suspects that their fees surpass the true cost of their project’s impacts, they can request an audit of the fees. The protesting party may request an independent auditor but they must cover the cost of the audit. However, the local government must cover the cost of the audit if they required the payment of the fee, but failed to adhere to MFA regulations surrounding the establishment or increase of a fee for three

20

consecutive years. If the audit determines that the fees exceed the cost of public facilities, the local agency must adjust the fee (Gov. Code §66023).28

The Mitigation Fee Act also includes a mechanism by which a party can protest an impact fee. When a development project is approved or the fee is imposed, the local agency must send a notice of the fee amount and note that the 90-day window to issue a legal protest has begun. When protesting, the applicant must still pay the fee in full or show evidence of arrangements to pay the fee when due, as well as serving a notice to that effect and outlining the reasoning for their protest. If the court invalidates a fee ordinance or resolution or finds in favor of the plaintiff, the local agency at fault must refund the unlawful portion of the fee plus interest (Gov. Code §66020).29

Impact Fees and Housing Affordability

Impact fees, and development fees more broadly, are politically popular because they are charged to developers rather than current residents. However, research has shown that existing landowners and homebuyers often ultimately pay at least a portion of the fees, while existing homeowners do not. While developers can pay the fee themselves (by accepting a lower return), they can also “pass” these costs to the sellers of developable land (who could accept a lower price for their land), or to the residents of the new developments (in the form of higher home prices). If the imposition of a fee pushes a project below an acceptable risk-adjusted return, investors will not contribute capital to the project, meaning that the development is unlikely to be built.

The strength of housing demand and the availability of similar developable land in nearby localities will affect who will bear the burden of an impact fee. Economists typically analyze the effect of a fee as similar to that of a tax, arguing that the incidence of the fee depends largely on the elasticity of demand (Figure 2). If housing demand is strong, or inelastic, and if there are no substitutable sites in similar markets with a lower fee, developers will likely still have opportunities to achieve the return necessary to attract institutional financing by “passing” the fee to buyers of the new homes, shouldering less of the burden of the fee themselves (Figure 2, Graph A). Weaker markets, or markets where there are substitutable sites in nearby localities without fees, will likely see developers and landowners pay more of the fee from their profit margin, or see a short-term drop in building as few or no developable sites meet the return requirements of developers and investors (Figure 2, Graph B). Over time, owners of developable land will adjust to the fee and accept lower prices, allowing for more housing production.30/31 Empirically, impact fees have often been found to be borne by buyers of both new and existing housing, particularly for those who bought homes in strong economic markets or shortly after the fee was implemented, with landowners also bearing a portion of the fee in some cases.32/33 /34/35/36/37 The share of fees borne by developers, and the factors that affect this share, are unclear—likely because of a lack of data about developers’ financial circumstances.

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Burden

1,000 1,250

Quantity (Housing Units)

GraphA

S1 = Supply S2 = Supply+ Impact Fee

$800,000 ~ ------....:;,-_ $775,000 ____ ....,._.._,,-,...

--1,000 1,650

Quantity (Housing Units)

GraphB

Figure 2: Incidence of an Impact Fee with Inelastic and Elastic Demand

Through an examination of two Bay Area submarkets (East Bay and South Bay), we found that impact fees comprise a relatively small but significant amount of the overall cost of development, and that increasing fees could result in higher rents to maintain threshold return requirements for financial partners, or could shelve the project overall if project revenues fall below the threshold. For example, the South Bay prototype analysis revealed that an increase of impact fees from $40,000 per unit to $60,000 per unit on a 160-unit residential project considerably lowered the project’s return on cost,38 thereby lowering the likelihood that the prototype project would be built absent higher rents or other measures to offset the increase in fees. 39/40

Fees can also, either by intent or effect, be exclusionary or regressive. High fees have been shown to limit or preclude the development of lower-cost housing. Research has shown that fees contributed to a halt in the construction of starter homes in a number of California cities.41 In addition, fees have been found to be associated with increases in home values for existing homes, which can result in increased tax revenue, but also has implications for housing affordability across a community.42 Reducing development fees in some California localities could be expected to lower new home prices enough to significantly reduce the minimum income necessary to buy a new home.43

Scholars have also found evidence of exclusionary intent in some fee programs.44/45 Fee programs that assess high fees on housing for low- and moderate-income people, or that fund particularly high levels of public services, should be subject to greater scrutiny. While affordable housing impact fees are typically waived for affordable projects,46 these types of projects are often expected to pay other impact fees, and these fees are often substantial. Sacramento recently announced that the city will waive all impact fees on affordable housing projects as a way to encourage this type of development; one affordable housing developer estimated that the program could save as much as $450,000 in costs on a current project.47

While high fees are not inherently inefficient or unethical, they raise concerns about limiting housing production, skewing production that does occur to higher-priced units, and worsening regional housing affordability.

22

The relationship among fees, housing prices, and affordability is complex. It is clear that, in many markets, impact fees may be passed on to consumers in the form of higher home prices. While impact fees may increase home prices, it is possible that some amount of the observed price increase is the result of fees increasing the quality of housing (for example, by increasing investment in neighborhood related amenities such as parks), clouding the impact that fees may have on housing affordability. In addition, given the very limited resources to support growth-related infrastructure in California, it is possible that, in certain circumstances, fees may be the most feasible option to finance infrastructure for housing generation. Fees can also impose a cost on externalities, such as traffic and air pollution, encouraging more efficient development patterns and providing benefits to new residents including, for example, lowering transportation expenses. Lastly, affordable housing fees are channeled to affordable development, redistributing resources to low- and moderate-income families by lowering their housing costs.48 However, given California’s acute housing shortage, the state should consider options for minimizing fees and ensuring that they are not imposed in such a way that limits new supply.

Study Design Shining a Spotlight on Impact Fees

Cities and counties in California impose a wide variety of fees on residential development. Per AB 879, this report focuses only on fees subject to the authority of the Mitigation Fee Act, commonly known as impact fees or AB 1600 fees. To better understand the diversity of impact fees in California, we selected cities and counties across the state to review in greater detail. We interviewed local agency staff and nexus study consultants, and reviewed an array of public documents. In addition, we traveled to three regional forums organized by the California Department of Housing and Community Development in the fall of 2018, where we discussed our research and interviewed local staff, developers, and advocates. Our scans, interviews, and fee calculations from these localities informed our findings throughout the report.

Study Cities and Counties

We conducted in-depth case studies of ten localities for this report (Figure 3). This group of ten includes the three urban/suburban pairings from an earlier Terner Center fee study, It All Adds Up: Los Angeles and Irvine in the southern coastal area, Oakland and Fremont in the Bay Area, and Sacramento and Roseville in the Sacramento area.49 We also added four new localities, selected to increase geographic and market diversity: Riverside County, and the cities of Imperial, San Diego, and Fresno. We conducted in-depth interviews with planning professionals in each locality and worked closely with them to calculate impact fee estimations.

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• •

• • • •

• • • •

• In -Depth Case Study Cities and Counties • Sample Cities and Counties

Figure 3: Case Study and Sample Cities and Counties

To broaden our analysis, we also conducted a scan of 40 jurisdictions across the state (Appendix A). We reviewed the availability of fee schedules, nexus studies, and annual financial reports in each of these 40 cities and counties, and drew from this sample when analyzing nexus studies in greater detail. We chose a set of cities and counties that included a variety of sizes, densities, housing prices, and household incomes, as well as balancing majority renter and majority homeowner cities. The research team also reviewed data from the Terner Center California Residential Land Use Survey to select cities and counties with differing levels of single-family and multifamily zoning, impact fee amounts, and inclusionary requirements.50

Impact Fee Calculation

For our impact fee estimates, we returned to the two prototypical projects originally designed by Mawhorter, et al. in It All Adds Up. The researchers designed these projects (described in Table 2), based on detailed interviews with architects, civil engineers, developers, and planning staff.

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Table 2: Characteristics of Prototypical Projects

Multifamily project Single-family project

Location Urban infill Suburban greenfield

Number of units 100 apartments 20 single-family homes

Bedrooms per unit 50 1 bedroom apartments 50 2 bedroom apartments

10 3 bedroom, 2.5 bath homes 10 4 bedroom, 3 bath homes

Stories 5 residential stories above 2-story parking garage

2-story homes

Square feet per unit 850 square feet average 3 bedroom: 1,850 square feet 4 bedroom: 2,250 square feet

Total building square feet 143,240 square feet 50,680 square feet

Lot size 0.64 acres total 2.44 acres total

Density 156.3 units per acre 8.2 units per acre

We relied on fee schedules and annual financial reports to identify which fees were applied to our prototypical projects and calculate the total exaction for our prototypical projects in each of our case study localities. Local staff helped us to identify fees and reviewed and confirmed each of our fee calculations.

In It All Adds Up, we considered all of the local development fees that would apply to a project, however, we amended and updated our calculations for this analysis to only include Mitigation Fee Act fees.51

Fee Typologies

Localities typically categorize fees based on the services they fund. We found that impact fees in our ten case study localities fell into one of eight categories:

Transportation fees fund the costs of expanding transportation infrastructure usage related to new development.

Environmental fees pay for environmental mitigation programs.

Fire and public safety fees go towards expanding the capacity of fire and public safety systems.

Library fees go towards expanding library resources.

Park fees are set aside for parks facilities and parkland.

Housing fees are earmarked for developing affordable housing needed to complement market-rate housing growth.

Capital improvement fees are fees that pay for any expansions of city facilities or infrastructure, such as facilities for general administration, health and human services, and public works.

Utility impact fees pay for expansions of water, sewer, electricity, and gas infrastructure.

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Some localities pair impact fees with a small administrative fee to cover the cost of fee implementation and collection. In those cases, we placed the administrative charge in the same category as the fee it supported.

Our scan of cities and counties, as well as our in-depth case studies, informed our finding that local jurisdictions can improve the accessibility of fees. In the next section, we review those findings and consider the benefits and costs of proposals to improve fee transparency.

Fee Transparency One of the key findings from It All Adds Up is the difficulty of estimating the total fees (which we refer to as the “fee stack”) on any specific project. This lack of transparency can prevent the state and localities from tracking and assessing the feasibility and reasonableness of fees. We reviewed three aspects of fee transparency: availability and accessibility of nexus studies, the availability of fee schedules, and the accessibility of fee calculation.

Publicly Available Nexus Studies and Fee Schedules Development cost information enables developers to gauge the feasibility of their project at the earliest stages of development. Developers draft a proforma as a first step in conceptualizing a potential project, and the cost of all local development fees represents an important line item in that project budget. Developers we spoke to noted that they often begin this process by searching online for development fee schedules to come up with an estimate of fee costs. Beyond their value for estimating project feasibility, development fee schedules also provide a window into the cost of building at the local level, as well as funding priorities for the city. Those priorities are reflected in the nexus studies that provide the foundation for establishing a specific impact fee and a locality’s related fee schedule.

Nexus studies are rarely easily accessible to the public.

Only 28 percent of the localities surveyed posted all of their nexus studies clearly online. For the majority of localities reviewed, this information was not readily available and in some cases was very difficult to obtain. Often, researchers had to sift through city council agendas or submit a public records request to access the studies or annual reports. In some cases where nexus studies were provided, the information appeared to be outdated, sometimes significantly so. In one instance, a locality provided a nexus study from the 1980s, and explained that this was the most recent study they had. The lack of availability of this information is concerning because without access to this information, the appropriateness of a locality’s nexus study cannot be examined.

While most municipalities reviewed did not clearly post nexus information on their websites or faced challenges providing the requested information, some stood out for their transparency and ease. For example, the cities of Los Angeles, San Diego, Oakland, and Ontario clearly posted their nexus studies on their websites, and required no additional requests or follow up with local staff.

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Fee schedules can be challenging to find.

Jurisdictions draft fee schedules, but they can prove challenging to locate and are not always updated or complete. While some schedules provide a neat compendium of all residential development fees and clearly indicate impact fees therein, other jurisdictions adopt their fees through different ordinances or post them on different department websites, complicating the process of identifying and estimating fees. In our scan of ten case study localities, we found that only six localities had a central, comprehensive impact fee schedule easily available online, two of which were located on a master fee schedule. In four of the ten localities, impact fee schedules were scattered across various department websites, and in one case, the fee schedules had to be requested via email.

In contrast, cities like Fremont clearly list all their development fees on an updated master fee schedule with impact fees clearly identified. The city also provides a summary sheet on impact fees that lists the fee amounts and answers frequently asked questions about the fees. Oakland is another example of using best practices for accessibility of impact fee schedules, specifically. The city sets aside all impact fees on a separate web page, and places the fee schedule next to information on related meetings, municipal code chapters, administrative regulations, links to utility and school fees, nexus and feasibility studies, and annual fee reports.

While public fee schedules ensure public transparency around impact, fees estimates can allow developers to draft more precise proformas early on in the development process. Some jurisdictions rely on fee estimates rather than schedules to help developers identify total development fee costs. For example, Sacramento, Roseville and Fremont provide comprehensive estimates for development fees in advance.52

Impact fees can be difficult to identify on fee schedules.

Jurisdictions rarely distinguish impact fees from other residential fees, and sometimes refer to fees that are not subject to the mitigation fee act as mitigation or impact fees. We found that, in many cases, fees may be termed “impact fee” or “mitigation fee” and not be treated as such by the city, or be clearly identified as a tax or a Quimby Act in-lieu fee in city ordinance. While this distinction may be less important to developers, given the specific audit and findings provisions of the Act, it seems reasonable for localities to clearly flag fees that fall under the Mitigation Fee Act.

We found that it was typically easiest to request annual reports to determine which fees were identified as impact fees. However, only six of forty jurisdictions clearly posted their annual reports online. Some jurisdictions did not consolidate all of their impact fees in a single annual report. In one case it was necessary to request reports separately from three different departments. One locality’s annual fee report also included development agreement fees, which should fall outside of the authority of the Mitigation Fee Act. Finally, counties, transportation districts, and councils of governments sometimes exact impact fees that apply to developments within the city jurisdiction and issue their own annual fee reports. Although annual fee reports should assist the public in identifying impact fees, tracking down those reports can pose a separate challenge.

Some localities provided more clarity around impact fees. Riverside County, for example, hosts a website called “Map My County” which outputs a full report on a parcel, including the applicable development

27

impact fees. This approach is a clear way to identify all applicable impact fees, particularly when a locality has fees which vary by geographic or proximity zones. Others, like the City of Oakland, only levy a small number of impact fees and clearly title them as such on a separate webpage. Whether localities provide an online database of fees or simply list them online, such approaches ensure that impact fees are transparent and accessible.

Policy Considerations Clearly post all nexus studies and feasibility studies on localities’ websites.

The state could create a standard of transparency for nexus studies, as well as any other information utilized to set fee amounts such as feasibility studies (which determine how fees impact the feasibility of housing development). In addition, respondents highlighted the importance of requiring municipalities to plainly exhibit what the nexus fee amounts are and how they were determined—perhaps in a standardized format—rather than assuming the information presented in a consultant’s report can be easily understood by the general public. Interviews also surfaced the importance of releasing studies well in advance of fee adoption, allowing time for the public to review the materials and debate their reasonableness. The same could be true of any information or process used to determine what the final fee amount will be, which is almost always different than the maximum allowable fee as determined in the nexus study itself.

Requiring a higher level of transparency for nexus studies would impose administrative costs on local agencies. While the cost of locating and posting nexus studies should be relatively low, it might be more challenging for localities to translate nexus studies for the general public. The upfront expense and administrative burden of this requirement could be lowered by grandfathering in existing nexus studies, so that localities could fold this added transparency into future contracts with nexus consultants.

Require jurisdictions to post clear, comprehensive, and up-to-date development fee schedules.

Localities could remove one of many barriers to development by making local development fees easier to estimate. Calculating more precise project costs earlier in the development timeline would allow developers to enter the market with less risk, increasing the likelihood that new housing projects will get financed. Cities and counties could make this most effective by including all local development fees and taxes on a single regularly updated fee schedule. (This recommendation would not apply to highly variable fees, such as those based on staff hours.) Rather than burying a fee schedule in city council minutes or ordinances, localities could clearly title the schedule and prominently display it on the website of a department typically catering to developers. Cities like Roseville are already doing this, and conversations with developers highlighted the importance of using schedules can help to estimate the cost of fees.

Jurisdictions with fees specific to a neighborhood or area could provide clear fee maps, and, where possible, provide an interactive GIS map with all of the fees so applicants would not have to check their project site against multiple documents. For example, Riverside County’s Map My County website effectively overlays neighborhood-specific fees so that a developer can easily assess the fees that apply to a prospective site. For the sake of estimation as well as transparency, localities could make maps easily available and searchable.

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Localities could further promote transparency and oversight by clearly identifying impact fees in a master fee schedule or making a separate fee schedule available for impact fees. While it may seem like a small step, providing a consolidated fee schedule could improve efficiencies, yielding an outsized payoff for the cost of implementation.

Require local governments to make annual fee reports easily available to the public.

Local governments are already required to list fee amounts in their annual reports,53 however, as discussed, these reports are often only available via request and are sometimes submitted by separate departments within the same jurisdiction. Since cities and counties already draft these reports, requiring localities to submit one annual report that coordinates across departments to summarize all of their AB 1600 fees—and to clearly post the report online—would provide a relatively simple solution.

Require jurisdictions to confirm the availability of their fee schedules and annual fee report in their Annual Progress Reports (APRs) for their Housing Element.

To improve jurisdictional accountability to making their fees transparent, HCD could require that localities provide their fee schedule and annual fee report as part of their APR reporting. The Housing Element, updated on a four-, five-, or eight-year cycle, already includes a section where localities must identify constraints on housing development, both governmental and non-governmental, and outline efforts to remove obstacles to meeting their housing needs. “Fees and Exactions” are one of the constraints localities must cover, and the required analysis includes topics such as identifying development fees and explaining “how they have been established relative to [...] statutory requirements.” However, Housing Elements do not require that cities provide an updated fee schedule or annual fee reports.54

The state could amend Housing Element law to require that localities provide a comprehensive and updated schedule of all development fees exacted on a residential development and the most recent annual fee report in their annual progress reports, which provide an update on housing production and steps taken to implement the housing element. HCD could compile the fee schedules and fee reports into one publicly-available document, similar to their collection and posting of ADU ordinances. By requiring localities to regularly report their fee schedules and annual fee reports, the legislature could further the spirit of Housing Element law, which aims to ensure that localities plan for and encourage residential production. Ideally, the law would require localities to post an updated development fee schedule that collates local, county, and utility fees in a single document or interactive program, as well as an updated annual fee report.

Requiring confirmation in the APR would effectively incentivize localities to collect, update, and make accessible their schedules and annual fee reports every year. The approach would also prove efficient, in that HCD already tracks and reviews APRs, and the addition of a confirmation requirement would fit easily into the existing structure.

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Transparency in Fee Calculation Impact fee calculation can be relatively straightforward if clear and current fee schedules are available.

Once an applicant locates an accurate and clear fee schedule, impact fee calculation is typically fairly straightforward. Whether calculating fees based on acreage, units, bedrooms, or square feet, a developer should have a sense of those metrics earlier in the development process, and be able to estimate the magnitude of their impact fee costs. Fees that vary by area are similarly straightforward; as long as jurisdictions release clear fee maps, an applicant should be able to locate which fees apply to their project. The challenge in estimating impact fees comes less from calculating the fees than from first, determining which fees fall under the authority of the Mitigation Fee Act, and second, finding or requesting and obtaining the various fee schedules. Because fees under the Mitigation Fee Act are subject to specific findings and protest provisions, it is important to be able to identify them.

However, developers and the public may run into more complications when attempting to calculate total development fees for a proposed project.

In It All Adds Up, we estimated the total stack of development fees for a project. We encountered a number of obstacles in that research, ranging from unavailable or obsolete development fee schedules to missing maps for neighborhood-specific fees. Other types of fees, such as service fees charged per staff hour, further complicated estimation.

Policy Considerations Require jurisdictions to provide fee estimates as well as public guidance on how to calculate development fees.

By requiring localities to provide development fee estimates before fees are determined, policymakers could lower the risk of residential development. Fee estimates help developers assess project cost and feasibility more precisely during the pre-development phase, bringing more certainty to the financing process.

Cities and counties could also provide sufficient materials and guidance for an applicant to estimate all of their development fees early in the development process. These materials should include updated maps for neighborhood fees (ideally accessible via an online mapping interface that overlays multiple zones for quick review), typical service hour ranges and utility fees for relevant project types, and updated, comprehensive development fee schedules. Localities could go further to create a workbook similar to Roseville’s Residential Fee Booklet, which walks applicants through each step of estimating their fees. This may not be necessary if all applicable fees are collected in one schedule, and the fees are simply structured with clear multipliers and amounts.55

Such an approach would require a relatively small, upfront cost while lowering risk for developers and increasing government transparency. By bringing more transparency to local development costs, this requirement would allow potential developers to shore up their proformas earlier in the process. While some might contend that local estimates serve the same purpose as fee schedules, updated fee schedules

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with clear guidelines illuminates these costs for all interested parties, not just project applicants. Furthermore, collating development fees across developments will help localities consider the feasibility of any proposed fee increases and how those increases would affect their total fee stack.

A note about support for local capacity In many ways, the challenge of finding detailed fee schedules, annual fee reports, and nexus studies online reflects a lack of resources at the local level. We heard this repeatedly at regional forums with local agency staff and occasionally when working with staff in our case study localities. For less-resourced local governments, the daily work of reviewing and approving applications takes precedence over conducting a full review of all development fees or consolidating annual reports and nexus studies. Any requirement focused on increasing transparency or reducing the cost of fees should consider the budgetary and staff capacity implications for local governments and could be paired with additional support and/or technical assistance from the state.

Fee Structure The ways in which localities structure fees—from timing to rate schedules—can affect development costs in subtle ways. In this section, we first review current practices around the timing of fee imposition and collection, and consider policy proposals aimed at increasing the window between the two in order to lower carrying costs and reduce risk. Localities can also design fee schedules to incentivize certain types of development. We outline the ways in which localities currently structure their fees and weigh a number of proposals that aim to improve the proportionality of fees—the extent to which they accurately reflect the cost of development impacts—while stimulating the development of dense multifamily housing, rather than large single-family homes.

Fee Timing The timing of fee imposition—the point in the entitlement and development process at which impact fees are calculated and assessed—can be just as important to developers as the feasibility of fee estimation. The sooner a developer knows their fee costs, the sooner they can estimate a project’s overall costs and feasibility. Local agency staff, on the other hand, prioritize setting fee amounts later in the development process to better capture the most up-to-date fee rate. Staff also impose fees later in order to capture the up-to-date impacts of developments that experience delays in the period between building permit review and construction.

Developers we spoke to raised concerns about the timing of fee collection. Developers prefer to pay fees later in the development timeline, seeking to shorten the window between collection and project completion in order to lower the cost of interest on loans. Local agency staff would prefer to collect the fees earlier in the process. They want to ensure that they can fund the infrastructure needed to support a

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new development, some of which, such as utilities and transportation investments, need to be built in tandem with the new development.

Fee Imposition Fees are typically imposed at the time of building permit application or issuance.

In our case studies, we found that cities and counties in California typically impose fees—or determine the fee rate for a project—at the time of building permit application or building permit issuance (Figure 4). One city imposes fees at the time of construction plan review, while another imposes one of their fees when the certificate of occupancy is issued. Six localities imposed at least one of their fees at the time of building permit issuance, while four imposed at least one fee at the time of building permit application.

Oakland provides an example of a more complicated fee imposition schedule; the city specifies in their online materials that if a building permit application expires, or changes are made that require a new building permit, the fees are imposed at the time of the new application. Similarly, if a building permit is not approved within a one year window following the most recent application, the fees are imposed at the time of approval. Finally, the certificate of occupancy must be issued within three years of the building permit issuance; otherwise, the fees are imposed at the time of issuance of the certificate.56 Oakland needed to clearly outline the timing of fee imposition because their new impact fees stepped up dramatically over the first few years after adoption. For example, their total impact fees per unit in Fee Zone 1 (downtown Oakland and the hills) increased from $8,500 in September 2016 to $15,500 in July 2017, ultimately leveling off at $28,800 in July 2018.

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Building Permit Issuance of Building Application Penn.it

Issuance of Certificate of Occupancy

Figure 4: Fee Imposition Timing Across Case Study Cities

Local staff noted that often there is a lag between project approvals and development. When discussing this lag, some noted that several years can pass between permitting, building approvals, and the actual construction of a building due to project-specific or market changes, such as a recession. In some cases, a developer may substantially revise the project, which could result in substantive changes to the project scope and infrastructure impacts. Localities impose fee amounts later in the development